Consumer Action Law Centre welcomed a new report from the Australian Securities and Investments Commission (ASIC) which questions whether payday lenders are complying with the law.
The 2013 law reform introduced new responsible lending presumptions to address risks associated with repeat borrowing. The report found that some lenders’ files do not sufficiently demonstrate that a payday loan has been lent responsibly when an applicant is in default on another loan, has an existing loan, or has had a loan within the last 90 days. Some two thirds of the 288 files reviewed indicated that the payday lender had entered into a small amount loan with a consumer who appeared to trigger the presumptions of unsuitability, indicating that the law is not inhibiting repeat borrowing.
The report also found weaknesses in documentation and record keeping, including how lenders inquire into a consumer’s objectives and needs before advancing a loan. Some payday lenders continue to inappropriately use high-level statements, such as ‘personal’ or ‘temporary cash shortfall’, to describe the purpose of the loan.
Concerns are also raised about the use of third party software to obtain consumers’ bank account statements. Not only does third party software raise issues with disclosure, security and privacy, but ASIC also saw examples of incoming payments being identified as ‘salary’, which appeared to be loan payments from another payday lender.
Consumer Action Law Centre CEO Gerard Brody says ASIC’s findings align with the Centre’s experience with payday lenders. Consumer Action’s lawyers and financial counsellors have seen a systemic failure by lenders to properly assess clients’ capacity to repay loans as required by responsible lending provisions enacted in 2010.
‘If there is an assessment, it is common that the clients’ capacity to pay is considered but results may be skewed by reducing living expenses to a minimal amount. This isn’t surprising when a lender is relying on third party software and algorithms to complete suitability assessments.
‘The recent Federal Court case against The Cash Store confirmed that responsible lending requires a lender to assess a customers’ income and expenses, including day to day living costs, before offering them a loan. We think it is inappropriate to rely on software and average expenditure models without taking the person’s individual circumstances into account, and it seems that ASIC agrees.’
ASIC’s report also identified problematic practices where payday lenders set the loan term for 12 months or more, where the client had requested a loan term of well under 12 months. ASIC said this seems to be an attempt by lenders to ensure they can recover 12 months of monthly fees, even though the longer term loan does not meet the clients’ objectives or needs.
‘We need strong anti-avoidance provisions in the credit legislation to address this type of behaviour. The last thing someone struggling to make ends meet is to have extra monthly fees thrown on top of an already very expensive loan,’ said Mr Brody.
Media Contact: Michael Bellairs, 0413 299 567
Note: Payday lenders offer short-term loans with annualised percentage rates of around 240 per cent. They often set up direct debits repayments so that they withdraw money from the borrower’s account on their payday or pension day. This means that the lender gets paid before the borrower has had a chance to allocate sufficient money for groceries, rent, medicine and utility bills. It puts borrowers in a perilous position and, sadly, they often go back to the lender for another loan just to meet their living expenses. We’ve seen cases where a borrower has had up to 70 short-term loans in the space of three years. See our infographic on payday lending here.